Book Review: The Informal Economy in Developing Nations - Hidden Edge of Innovation?

Off the beaten path of science and technology innovation lies a world of innovation in the informal sectors. Think lifehacks but with the goal of improving handmade soap, making-do with limited materials or other forms of improvisation and improvements outside the formal economy. Do innvotors in the informal sector protect their ideas? If so, how?  Staring with this exam question, a new book examines innovation in the informal economy, its structure, impact and role in economic development. The Informal Economy in Developing Nations book draws on WIPO research and, like the other volumes in the Intellectual Property, Innovation and Economic Development series, aims to inform policy through scholarly analysis, with an emphasis on economics. Edited by IP economists Erika Kramer-Mbula (Tshwane University) and Sacha Wunsch-Vicent (WIPO), the book seeks to apply analysis of innovation in the informal economy to policy.

The informal economy is the part of the economy not monitored by governments. It does not necessarily break laws; it is simply not captured by standard government regulation. Common types of labour in the informal economy include domestic workers, home-based and street vendors, and informal employment in construction, farming and textiles. As the authors detail, innovation in this sector does not follow the classic science-and-technology-innovation (STI), but a doing-using-and-interacting (DUI) process of innovation. IP has been developed for STI, and is less adroit at protecting DUI; hence investigating the informal sector can give us fresh insights into the machinations of IP.

The book is a collection of chapters which build a comprehensive picture of the informal economy and innovation. Early chapters detail the evolution of the definition of the informal economy and statistics, and our current understanding. Later chapters examine country-specific studies in Kenya, South Africa and Ghana, and the final chapters bring the analysis into IP, innovation and policy.

A picture of a man using a home-made welder for
the jua kali sector in Kenya, Erik (HASH) Hersman

A chapter on the informal metalworking sector in Nairobi, by Christopher Bull, Steve Daniels, Mary Kinyanjui and Barrett Hazeltine, looks at the production of metal goods such as pots, pans and wheelbarrows in the Kamukjunji region. The informal sector is so economically and cultural relevant in Kenya, that is is known as jua kali ("hot sun" in Kiswahili), and workers are referred to as fundi. The sector accounts for 20% of Kenyan GDP and the majority of job growth. Using photographic evidence and interviews, the authors identified innovations in the sector. The study finds that while the sector differentiates with quality and style, product or process innovation is sporadic; reverse engineering is the norm and secrecy is discouraged. The collaborative nature of the sector means the strongest 'protection' for innovation stems from first-mover advantage, which is estimated to last two-weeks. Currently, a cost-benefit analysis does not favour securing IP.  The authors conclude that there is scope to improve access to IP protection through awareness and grants, which, along with structural changes to help the domestic sector compete with imports, could benefit the sector.

Turning to South African home and personal care products, Erika Kraemer-Mbula examines the production of products such as lotions, cosmetics and detergents. Kraemer-Mbula notes that South African apartheid limited opportunities for black entrepreneurship, thereby restricting the majority of the population. The informal economy emerged as the, "entrepreneurial response to the legislative limitations." Analysing survey data, the author finds innovations in improved formulations, packaging, process and quality control. 76% of surveyed manufacturers did not feel ownership of the ideas associated with their products. Yet, 80% have their own brand, and nearly half have of respondents use secrecy as a protection mechanism. As is often the case with small businesses, surveyed firms report low levels of IP awareness, or consider it "unsuitable" or "inaccessible." Kraemer-Mbula suggests strategies to support appropriation:

1. Creation of industry associations
2. Raising awareness of IP
3. Promoting use of informal protection mechanisms

Shamnad Basheer, of SpicyIP, picks up on two main themes. He cautions against, "the simplistic tendency to superimpose an existing "formal" IP appropriation regime onto the informal economy," and, "it is foolhardy to assume that the informal sector simply needs to learn from the formal sector and formalise as quickly as possible. On the contrary, the informal economy may have important lessons for the informal economy..." Supporting innovation is important, but a formal approach to IP may not always be the answer.

The final chapters detail the challenges of developing policy to support the informal sector, and the difficulties faced in studying. The authors note that studies point to common strategies for IP protection (appropriation) in the informal economy: social norms, secrecy, customer relationship management, non-IP strategies such as first-to-market, and branding. An entire chapter is devoted to creating an agenda for the measurement of innovation in the informal economy - a longstanding point of frustration for economists. The authors discuss two main sticking points: how to ensure survey and interview questions get meaningful results, and how to chose samples that support valid studies.

The Informal Economy in Developing Nations does an admirable job of detailing current thinking and mapping out the way forward in this area. Readers interested in broadening their understanding of innovation, ways to appropriate the returns to innovation with frugal resources, and potential policy support solutions will find the book useful. The third in the series edited by WIPO Chief Economist, Carsten Fink, the book is commendable for drawing from a geographically diverse group of contributors. Nearly a third of the authors are women. Readers interested in conducting their own surveys will find the annexes helpful, as the full survey instruments (guidelines and interview questions) are included.

The Informal Economy in Developing Nations: Hidden Engine of Innovation?, edited by Erika Kraemer-Mbula, Sacha Wunsch-Vinceny, Cambridge University Press, 2016, ISBN 9781316798942, is available here for £100 in print, and $100 in e-book. Rupture factor: Medium, 400 pages.